Case study

6 Battery Road

by Professor Ian H. Giddy
New York University

Please examine the terms of the deal described below.
What is the nature of the options given to the investor, and what are they worth?

December 1999

In conjunction with the securitisation of 6 Battery Road (the "Building") by DBS Land, Clover Holdings Limited ("Clover"), a special purpose vehicle, will issue S$878,000,000 10-year fixed rate Bonds together with 87,800 Preference Shares to purchase the Building, valued at S$835,000,000, and cash of S$43,000,000 which will be used to fund future upgrading works of the Building. Every S$10,000 bonds will come with one Preference Share of S$0.10 each. The Bond Issue will comprise S$550,000,000 of Senior Bonds and S$328,000,000 of Junior Bonds.
DBS Bank, the Manager of the Issue, will make available S$50,000,000 Senior Bonds to retail investors. The retail offering will be the largest Bond IPO in Singapore. Said Mr Eric Ang, the Managing Director and Head of Capital Markets at DBS Bank "We have increased the retail tranche in response to the strong demand from retail investors for Bond IPOs. Our previous 5 issues were sold out within hours. Clearly the investing public is looking for higher yielding alternatives to fixed deposits in Singapore."
In a conscious effort to satisfy demand, DBS Bank has also introduced a clawback feature to increase the size of the retail tranche from S$50,000,000 to up to S$100,000,000 if retail demand remains unsatisfied. 
"The clawback gives us the flexibility to increase the size by up to S$50,000,000 if demand for this issue is as overwhelming as our previous issues" said Mr Eric Ang. If the clawback is exercised, the placement tranche of the Senior Bonds will be reduced accordingly. 
The Senior Bonds will be offered at S$1 per unit (in multiples of 10,000 units and subject to a maximum of 1,000,000 units per investor). The Coupon on the Senior Bonds is 6% per annum payable semi-annually. The Junior Bonds will be taken up by DBS Land. In addition to the regular interest payments of 6% per annum, bondholders will be entitled to a share of any potential gains arising from the sale of the Building. This will either be distributed as a special preferential dividend or as a premium on the bonds at redemption.
The Bonds will be offered exclusively through DBS Bank and POSBank ATMs on a first-come-first-served basis from Wednesday, 8 December 1999 (9.30 am) to Tuesday, 14 December 1999 (12.00 noon) or immediately upon full subscription, whichever is earlier.
Like previous issues, this issue has a number of credit enhancements which make it superior to straight bonds. First, the Issuer, Clover, has no other indebtedness or liabilities besides the bond issue. Second, the bonds will have the Building as collateral. Third, the Senior bondholders have a security buffer of 34% as they rank ahead of Junior bondholders (only the Senior Bonds are offered to investors in this offering). This means that any fall in the current value of the Building will not affect the retail investors' principal amount unless the fall is more than 34% of the Building's current value. Fourth, the Issuer has an assured cashflow to service the interest payments. Finally, bondholders have an option of an early redemption in the 8th and 9th years, providing a window of two years to cash out if market conditions decline. Bondholders, holding not less than 35 per cent. in aggregate principal amount of the Bonds, could request Clover to redeem the Bonds.
6 Battery Road is a 999-year leasehold, 42-storey Grade A office building located in the heart of the Central Business District at Raffles Place.
The Bonds can be transacted at the Singapore Exchange Securities Trading Limited or at DBS Bank branches. Details of the Issue are found in the Prospectus, which are available at all DBS and POSBank branches.
DBS Bank has been very active in the development of the debt capital market in Singapore and will continue to promote fixed income investments to retail investors.

Copyright 1999 by DBS Bank. 
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